To Trust or Not to Trust?

Trust is a cornerstone of every successful marriage. Thus, it is ironic that the term that we lawyers use to describe the vehicle by which many of our wealthier clients protect and preserve their assets from their divorcing spouse is 'trust.' Today, in an era in which billionaires dominate the Forbes 400 list, when freshly minted MBAs just a year or two out of B-Schools garner seven-figure bonuses before the age of 30, the trust is becoming more and more the device of choice to shield assets from the grip of those who the creator of the trust deems undeserving of a share of those assets.

What Is a Trust?

A trust is a powerful estate-planning tool serving many purposes that range from tax advantages to asset protection. Trusts have become quite popular because grantors retain the freedom to choose and designate how their property will be used. Moreover, trusts are considered sacred legal devices 'which cannot be soiled by any illegal use.' Matter of Sage, 97 Misc2d 790, 797 (1979); and see; Pattison v. Pattison, 301 NY 65 (1950); Turano, Practice Commentaries, McKinney's Cons Laws of NY, Book 17B, EPTL 7-1.4 at 210.

Since trusts are acknowledged as an ultimate form of free will, they are rarely dissolved or otherwise disturbed by the courts. As a result, substantial matrimonial litigation has been devoted to determining whether or not assets held by a trust are marital property subject to equitable distribution.

The Question

As the divorce rate continues to hover in the range of 50%, those of us in the matrimonial law field are oftentimes confronted with questions pertaining to trusts. Questions proliferate, like, 'Should I put my assets in trust before I marry, in case things don't work out between my fianc' and myself?' Or, 'I like my future son-in-law, but I'm afraid he's only after the money my daughter will inherit; so, when I die, should I leave her my bequest in a trust?' Or, 'I've made a lot of money and want my children to enjoy it while I'm alive to see it, but I want to make sure that they ' and not their spouses ' continue to enjoy it. If their marriages fall apart, how can I protect it?' Or, 'Is there a way I can make sure that future generations of our family enjoy the fruits of my hard work and good fortune without having to share it with interlopers?' Often, the answer to these and similar questions is, 'Yes, put your money in a trust and it will be safe.' But, is that really true?

Then too, matrimonial practitioners may be faced with the questions posed by the client whose spouse is the beneficiary of a trust that has enabled them to enjoy an affluent, jet-set lifestyle (or merely a hyper-inflated middle class lifestyle), which their spouse would be unable to provide for the family but for the trust income. Can the client ' non-beneficiary spouse ' somehow reach into the trust to continue to receive the benefit of the trust income when the marriage has soured?

The answers to all of these questions, and more, of course, depend on the specific circumstances of each case. The following discussion should shed some light on the vexing issues that trusts bring to the matrimonial courts.

Who Holds Title?

The classification of property as 'marital' is at the core of New York's Equitable Distribution Law. New York was a title state prior to the enactment of the equitable distribution law on July 19, 1980. Absent a showing of fraud, or the establishment of a constructive trust, property was awarded to the spouse holding title. At present, however, if property meets the Domestic Relations Law's criteria to be deemed 'marital property,' it is then subject to distribution in accordance with equitable distribution principles, regardless of who holds title.

The form of the property's title has been considered in its classification as 'marital' even though a specific type of property by statutory definition would otherwise have been separate. This particular aspect of title and ownership becomes important in the courts' treatment of trusts during divorce proceedings due to their proprietary structure.'There is a 'presumption in favor of marital property, premised on the contemporary view of marriage as an economic partnership, crediting each party's contributions, whether monetary or not, to the growth and value of the marriage” (Bartha v. Bartha, 15 AD3d 111, 116 (2005), quoting DeJesus v. DeJesus, 90 NY2d 643, 648 (1997)).

In cases where separate property has been commingled with marital property or placed into the joint names of the parties, a presumption of a gift arises and, unless rebutted, the property is treated as marital. See, eg, Wiercinski v. Wiercinski, 116 AD2d 789, 497 (3rd Dept.1986); Parsons v. Parsons, 101 AD2d 1017 (4th Dept.1984); Zacharek v. Zacharek, 116 AD2d 1004 (4th Dept.1986); Coffey v. Coffey, 119 AD2d 620, 501 (2nd Dept.1986). Further, '[t]he party seeking to overcome the marital property presumption, has the burden of proving that the property in dispute is separate property' (Palumbo, 10 AD3d at 681-682, citing Farag v. Farag, 4 AD3d 502 (2004); Barone v. Barone, 292 AD2d 481 (2002)). It is well settled that 'the separate property exception to marital property is to be construed narrowly' (D'Angelo v. D'Angelo, 14 AD3d 476 (2005), citing Domestic Relations Law ' 236(B)(1)(d); Price, 69 NY2d at 15; Majauskas, 61 NY2d at 489, 474; Farag, Id.; Saasto, 211 AD2d 708).

At first blush, it may seem that it is an easy task to determine whether or not assets held by a trust are marital property. Unfortunately, there is nothing easy or academic at all in such an analysis.

Attempting to Reach the Trust Funds

Although it is quite tempting to refer to a trust's dissolution as the 'piercing of the trust's veil,' usage of such a terminology should be carefully avoided and not confused with the concept of piercing a corporate veil: 'There is no authority for applying, by analogy, a theory of 'piercing the corporate veil' to disregard the form of a trust ' ' See, National Union Fire Insurance Company of Pittsburgh v. Eagle Equipment Trust, 221 AD2d 212 (1^st Dept. 1995).

Attempting to dissolve a trust in the course of divorce litigation is quite difficult. Dissolution of a trust and distribution of its assets in divorces are infrequent, and practitioners are not offered much guidance by way of precedential case law. Depending on the complexity of the trust at issue and the nature of the assets held by the trust, preparing to seek a trust's dissolution may require hours of detailed coordination between counsel and forensic accountants. This collaboration between counsel and forensic accountant is important in determining whether separate and marital property were commingled and acquired by the trust at issue. It especially rings true in situations where trusts hold title to multiple income-generating businesses.

The division of property during a divorce proceeding is mandated by New York's Domestic Relations Law (DRL) and an extensive body of judicial decisions interpreting the DRL. However, it appears that the cases applying the DRL where a trust is holding some of the divorcing parties' assets are few. In 1936, the Appellate Division, First Department held in the case of Ferguson v. Ferguson, 247 AD 24, after the husband fell into extensive alimony arrears, that income derived from a trust fund should be equally divided between the spouses and that the income should be deemed personal property subject to sequestration in a divorce proceeding. Despite this 1936 precedent enabling trial judges to have an impact on income from assets held by a trust in a divorce action, case law in this area has not been plentiful.

At present, and until a ruling from the New York Court of Appeals holding otherwise, the Appellate Division, Second Department, has established precedent that holds that a trial court has the jurisdiction to determine whether offshore trusts are marital property subject to equitable distribution. In Riechers v. Riechers, 267 AD2d 445 (1999), the Second Department affirmed the trial court's decision permitting the wife to collect a one-half share of an irrevocable trust created by the husband with marital funds. In that case, the problem confronted by the wife was that the trust did not designate her as a beneficiary by name ' rather it designated the beneficiary as the 'spouse of the settler.' The trial judge found that the wife's interest would terminate upon the divorce becoming final and that the trust was marital property because there was 'clear and unequivocal' evidence that the trust was established with marital assets. He held that the New York trial court had no jurisdiction over a trust in the Cook Islands, which are off the coast of New Zealand. However, the judge also ruled that, since the court had personal jurisdiction over the husband in the matrimonial action, he had the power to order the husband to preserve the wife's interest.

The Riechers ruling is the first of its kind in this state because it declares the funds held by a trust to be marital property subject to equitable distribution. The Riechers case is an excellent example of the importance of 'clearly and unequivocally' proving that funds used to create a trust emanate from marital funds.

In Papson v. Papson, 1998 WL 1177948 (Index No. 10065/97, Queens Co. Sup. Ct. Satterfield, J), the defendant husband created a revocable trust in the Cayman Islands, pursuant to Cayman Islands law, naming his brother and another relative as beneficiaries. Justice Patricia Satterfield found that defendant husband established the fund to evade a judgment in a civil action and to shield marital assets from his wife. Finding that the Cayman Islands trust was fraudulently created, and violative of New York public policy, the court ordered termination of the trust, transfer of the funds to a New York account, and named the plaintiff wife temporary receiver pendente lite of the funds held by the trust.

In cases such as Papson, involving offshore trusts created by one spouse to frustrate the other spouse's equitable distribution rights, the Papson decision offers a practitioner strong public policy arguments. However, had there not been a finding by the court of the husband's deceptive intent, the court would have lacked jurisdiction to dissolve the trust because the trust was created pursuant to Cayman Island law.

Although there are many types of trusts, it appears that dissolving third-party trusts benefiting either spouse are the most difficult to dissolve. Usually these trusts hold business property, with one of the divorcing spouses serving as an employee or being involved in some type of family business. It has been held that, unless a spouse has a property interest in such a business, discovery of the business is impermissible. See, Briger v. Briger, 110 A.D.2d 526 (1^st Dept. 1985).

Even though the discovery of business records being held by a trust may seem out of reach, the First Department is permissive of a spouse's alternate efforts to dissolve a third party trust. In Spector v. Spector, 18 AD3d 380 (1^st Dept. 2005), the First Department upheld a ruling by Justice Joan B. Lobis in which she ordered a husband to cooperate in any action his wife might take to dissolve a trust of which jurisdiction of either the trust or other trustees before directing the beneficiary husband to cooperate with the wife to dissolve the trust because the trial court neither directed the dissolution nor broke up the trust at issue.

Conclusion

The meager body of published decisions issued within the last several years demonstrates that the New York Courts are taking some steps to employ their equity powers to equitably distribute martial property held in trust to divorcing parties, but not a lot of them. Perhaps the day draws near when the New York bench will decide to acquire jurisdiction of a trust and dissolve it within the main divorce action.

Although the currently available case law raises many questions and answers, only a handful of them, collectively read, (decisions such as Reichers, Papson, and Spector) have shed light on many of the pitfalls to avoid in this practice area.

Alton L. Abramowitz, a member of this newsletter's Board of Editors, is a partner with Mayerson Stutman Abramowitz Royer LLP. George Santana is also with the firm.

Trust is a cornerstone of every successful marriage. Thus, it is ironic that the term that we lawyers use to describe the vehicle by which many of our wealthier clients protect and preserve their assets from their divorcing spouse is 'trust.' Today, in an era in which billionaires dominate the Forbes 400 list, when freshly minted MBAs just a year or two out of B-Schools garner seven-figure bonuses before the age of 30, the trust is becoming more and more the device of choice to shield assets from the grip of those who the creator of the trust deems undeserving of a share of those assets.

What Is a Trust?

A trust is a powerful estate-planning tool serving many purposes that range from tax advantages to asset protection. Trusts have become quite popular because grantors retain the freedom to choose and designate how their property will be used. Moreover, trusts are considered sacred legal devices 'which cannot be soiled by any illegal use.' Matter of Sage, 97 Misc2d 790, 797 (1979); and see; Pattison v. Pattison , 301 NY 65 (1950); Turano, Practice Commentaries, McKinney's Cons Laws of NY, Book 17B, EPTL 7-1.4 at 210.

Since trusts are acknowledged as an ultimate form of free will, they are rarely dissolved or otherwise disturbed by the courts. As a result, substantial matrimonial litigation has been devoted to determining whether or not assets held by a trust are marital property subject to equitable distribution.

The Question

As the divorce rate continues to hover in the range of 50%, those of us in the matrimonial law field are oftentimes confronted with questions pertaining to trusts. Questions proliferate, like, 'Should I put my assets in trust before I marry, in case things don't work out between my fianc' and myself?' Or, 'I like my future son-in-law, but I'm afraid he's only after the money my daughter will inherit; so, when I die, should I leave her my bequest in a trust?' Or, 'I've made a lot of money and want my children to enjoy it while I'm alive to see it, but I want to make sure that they ' and not their spouses ' continue to enjoy it. If their marriages fall apart, how can I protect it?' Or, 'Is there a way I can make sure that future generations of our family enjoy the fruits of my hard work and good fortune without having to share it with interlopers?' Often, the answer to these and similar questions is, 'Yes, put your money in a trust and it will be safe.' But, is that really true?

Then too, matrimonial practitioners may be faced with the questions posed by the client whose spouse is the beneficiary of a trust that has enabled them to enjoy an affluent, jet-set lifestyle (or merely a hyper-inflated middle class lifestyle), which their spouse would be unable to provide for the family but for the trust income. Can the client ' non-beneficiary spouse ' somehow reach into the trust to continue to receive the benefit of the trust income when the marriage has soured?

The answers to all of these questions, and more, of course, depend on the specific circumstances of each case. The following discussion should shed some light on the vexing issues that trusts bring to the matrimonial courts.

Who Holds Title?

The classification of property as 'marital' is at the core of New York's Equitable Distribution Law. New York was a title state prior to the enactment of the equitable distribution law on July 19, 1980. Absent a showing of fraud, or the establishment of a constructive trust, property was awarded to the spouse holding title. At present, however, if property meets the Domestic Relations Law's criteria to be deemed 'marital property,' it is then subject to distribution in accordance with equitable distribution principles, regardless of who holds title.

The form of the property's title has been considered in its classification as 'marital' even though a specific type of property by statutory definition would otherwise have been separate. This particular aspect of title and ownership becomes important in the courts' treatment of trusts during divorce proceedings due to their proprietary structure.'There is a 'presumption in favor of marital property, premised on the contemporary view of marriage as an economic partnership, crediting each party's contributions, whether monetary or not, to the growth and value of the marriage” (B artha v. Bartha, 15 AD3d 111, 116 (2005), quoting DeJesus v. DeJesus, 90 NY2d 643, 648 (1997)).

In cases where separate property has been commingled with marital property or placed into the joint names of the parties, a presumption of a gift arises and, unless rebutted, the property is treated as marital. See, eg, Wiercinski v. Wiercinski , 116 AD2d 789, 497 (3rd Dept.1986); Parsons v. Parsons , 101 AD2d 1017 (4th Dept.1984); Zacharek v. Zacharek, 116 AD2d 1004 (4th Dept.1986); Coffey v. Coffey , 119 AD2d 620, 501 (2nd Dept.1986). Further, '[t]he party seeking to overcome the marital property presumption, has the burden of proving that the property in dispute is separate property' ( Palumbo, 10 AD3d at 681-682, citing Farag v. Farag, 4 AD3d 502 (2004); Barone v. Barone, 292 AD2d 481 (2002)). It is well settled that 'the separate property exception to marital property is to be construed narrowly' ( D'Angelo v. D'Angelo, 14 AD3d 476 (2005), citing Domestic Relations Law ' 236(B)(1)(d); Price, 69 NY2d at 15; Majauskas, 61 NY2d at 489, 474; Farag, Id.; Saasto, 211 AD2d 708).

At first blush, it may seem that it is an easy task to determine whether or not assets held by a trust are marital property. Unfortunately, there is nothing easy or academic at all in such an analysis.

Attempting to Reach the Trust Funds

Although it is quite tempting to refer to a trust's dissolution as the 'piercing of the trust's veil,' usage of such a terminology should be carefully avoided and not confused with the concept of piercing a corporate veil: 'There is no authority for applying, by analogy, a theory of 'piercing the corporate veil' to disregard the form of a trust ' ' See, National Union Fire Insurance Company of Pittsburgh v. Eagle Equipment Trust, 221 AD2d 212 (1 st Dept. 1995).

Attempting to dissolve a trust in the course of divorce litigation is quite difficult. Dissolution of a trust and distribution of its assets in divorces are infrequent, and practitioners are not offered much guidance by way of precedential case law. Depending on the complexity of the trust at issue and the nature of the assets held by the trust, preparing to seek a trust's dissolution may require hours of detailed coordination between counsel and forensic accountants. This collaboration between counsel and forensic accountant is important in determining whether separate and marital property were commingled and acquired by the trust at issue. It especially rings true in situations where trusts hold title to multiple income-generating businesses.

The division of property during a divorce proceeding is mandated by New York's Domestic Relations Law (DRL) and an extensive body of judicial decisions interpreting the DRL. However, it appears that the cases applying the DRL where a trust is holding some of the divorcing parties' assets are few. In 1936, the Appellate Division, First Department held in the case of Ferguson v. Ferguson , 247 AD 24, after the husband fell into extensive alimony arrears, that income derived from a trust fund should be equally divided between the spouses and that the income should be deemed personal property subject to sequestration in a divorce proceeding. Despite this 1936 precedent enabling trial judges to have an impact on income from assets held by a trust in a divorce action, case law in this area has not been plentiful.

At present, and until a ruling from the New York Court of Appeals holding otherwise, the Appellate Division, Second Department, has established precedent that holds that a trial court has the jurisdiction to determine whether offshore trusts are marital property subject to equitable distribution. In Riechers v. Riechers , 267 AD2d 445 (1999), the Second Department affirmed the trial court's decision permitting the wife to collect a one-half share of an irrevocable trust created by the husband with marital funds. In that case, the problem confronted by the wife was that the trust did not designate her as a beneficiary by name ' rather it designated the beneficiary as the 'spouse of the settler.' The trial judge found that the wife's interest would terminate upon the divorce becoming final and that the trust was marital property because there was 'clear and unequivocal' evidence that the trust was established with marital assets. He held that the New York trial court had no jurisdiction over a trust in the Cook Islands, which are off the coast of New Zealand. However, the judge also ruled that, since the court had personal jurisdiction over the husband in the matrimonial action, he had the power to order the husband to preserve the wife's interest.

The Riechers ruling is the first of its kind in this state because it declares the funds held by a trust to be marital property subject to equitable distribution. The Riechers case is an excellent example of the importance of 'clearly and unequivocally' proving that funds used to create a trust emanate from marital funds.

In Papson v. Papson, 1998 WL 1177948 (Index No. 10065/97, Queens Co. Sup. Ct. Satterfield, J), the defendant husband created a revocable trust in the Cayman Islands, pursuant to Cayman Islands law, naming his brother and another relative as beneficiaries. Justice Patricia Satterfield found that defendant husband established the fund to evade a judgment in a civil action and to shield marital assets from his wife. Finding that the Cayman Islands trust was fraudulently created, and violative of New York public policy, the court ordered termination of the trust, transfer of the funds to a New York account, and named the plaintiff wife temporary receiver pendente lite of the funds held by the trust.

In cases such as Papson, involving offshore trusts created by one spouse to frustrate the other spouse's equitable distribution rights, the Papson decision offers a practitioner strong public policy arguments. However, had there not been a finding by the court of the husband's deceptive intent, the court would have lacked jurisdiction to dissolve the trust because the trust was created pursuant to Cayman Island law.

Although there are many types of trusts, it appears that dissolving third-party trusts benefiting either spouse are the most difficult to dissolve. Usually these trusts hold business property, with one of the divorcing spouses serving as an employee or being involved in some type of family business. It has been held that, unless a spouse has a property interest in such a business, discovery of the business is impermissible. See, Briger v. Briger , 110 A.D.2d 526 (1 st Dept. 1985).

Even though the discovery of business records being held by a trust may seem out of reach, the First Department is permissive of a spouse's alternate efforts to dissolve a third party trust. In Spector v. Spector , 18 AD3d 380 (1 st Dept. 2005), the First Department upheld a ruling by Justice Joan B. Lobis in which she ordered a husband to cooperate in any action his wife might take to dissolve a trust of which jurisdiction of either the trust or other trustees before directing the beneficiary husband to cooperate with the wife to dissolve the trust because the trial court neither directed the dissolution nor broke up the trust at issue.

Conclusion

The meager body of published decisions issued within the last several years demonstrates that the New York Courts are taking some steps to employ their equity powers to equitably distribute martial property held in trust to divorcing parties, but not a lot of them. Perhaps the day draws near when the New York bench will decide to acquire jurisdiction of a trust and dissolve it within the main divorce action.

Although the currently available case law raises many questions and answers, only a handful of them, collectively read, (decisions such as Reichers, Papson, and Spector) have shed light on many of the pitfalls to avoid in this practice area.

Alton L. Abramowitz, a member of this newsletter's Board of Editors, is a partner with Mayerson Stutman Abramowitz Royer LLP. George Santana is also with the firm.